Osborne’s made his move. Now it’s Labour’s turn

by Jonathan Todd

We are a nation seeking to rebuild from the economic calamity of the past half decade. You might think this task merits a chancellor focused upon it. But George Osborne doesn’t look to Keynes, Friedman or other economists. He prefers his own ‘baseline theory’ of politics.

As we grasp for an economic rubber ring, we’re thrown the thin gruel of his politics. To the extent that his actions are informed by any economic strategy, it envisages a state so shrunken as to be beyond the ken of post 1945 Britain. Yet his political logic is robust enough that this troubling scenario may come to pass after May 2015.

Osborne’s theory is informed by an impeccable reading of recent general elections. It holds that oppositions never form governments unless they match the fiscal plan of incumbents. Governing parties hold the privilege of being able to set the fiscal baseline. Any departures from this baseline by oppositions will be subject to intense scrutiny. In 1992, this resulted in the Labour opposition seeming to threaten a ‘tax bombshell’, while in 2001 and 2005, it resulted in the Conservatives appearing a menace to public services.

Over the next 18 months or so, the TUC’s Duncan Weldon suspects, the implausibility of Osborne’s baseline will stretch this theory – perhaps to destruction. In this baseline, £25bn of additional spending cuts – much of them from the welfare budget – come after the next election. But, as Weldon notes, the necessity of running a surplus by 2018/19, which motivates these cuts, is not set in stone. It is a political choice. The UK will only come apart if Scotland votes for it, not if a surplus isn’t run by 2018/19.

In fact, there appears more likelihood of grim things happening if Osborne’s baseline is kept to than if it isn’t. It’s delivery – assuming no further tax rises, protection for pensioner benefits and continued ringfences for the NHS, schools and DfID – requires a much reduced role for government outside of ringfenced areas and/or further cuts for the disabled, children and the working poor.

This delivery isn’t impossible but it is likely to be brutal. Perhaps so much so as to effectively be impossible. The social strain and political pain might just be too much. Maybe Osborne knows this and has no genuine intention of seeing this through in the event of being in office after May 2015. But, in indicating that he will, he’s presented Labour with a set of unattractive options.

One such option is for Labour to accept Osborne’s baseline. In its toughest form, this would mean not only accepting £25bn of extra cuts but accepting that half of them will come from welfare payments to working age adults. This would put Labour in a position that Nick Clegg has already castigated as unfair.

It seems unlikely, therefore, that this will come to be Labour’s position. Instead, Labour might match the Liberal Democrat position: acceptance of the £25bn but rejection of the depth of cuts to working age welfare. This rejection, however, only deepens questions as to how the £25bn will be made up.

Wiggle room would be created by relaxing Osborne’s assumptions, which would mean some combination of additional tax rises, cuts to pensioner benefits and cutting within ringfenced departments. And it may require a sizeable chunk of all three of these unpalatable possibilities to match Osborne’s baseline.

Another approach for Labour would be to reject this baseline. According to Osborne, in doing so, Labour would be accepting general election defeat. To remain in a winnable position, his baseline theory demands that Labour accept a fiscal trajectory so precipitous and fraught that it’s questionable whether Osborne would actually even see it through himself.

If Labour rejects this baseline, Labour wouldn’t commit to deliver a surplus in 2018/19 or perhaps ever. Maybe Labour would come up with another measure of fiscal sustainability – focusing on, say, the structural component of the deficit or the ratio of debt to GDP. Which might apply over a longer time horizon than to 2018/19.

There is more than enough shared grey matter between the two Eds of Balls and Miliband to come up with such a measure. Perhaps sufficiently so to win over at least some of the intelligentsia. I can imagine Janan Ganesh, Osborne’s biographer, shaking his head at the column of Martin Wolf, his FT colleague. But Osborne wouldn’t be the first chancellor to electorally prosper in the face of the scorn of the cerebral economists like Wolf.

Having established his baseline, Osborne will swoop on any Labour departure from it as evidence of dangerous profligacy. Even if Labour commits to a surplus by 2018/19, differentiation from Osborne may create scope for him to associate Labour with tax bombshells, Benefits Street and threats to the wellbeing of the grey vote. To reject his baseline entirely, while it may make more policy sense, would be an even bolder political move.

Miliband is likely to use his first speech of 2014 on Friday to press ahead with his cost of living focus. But observers may be more interested in how he responds to the gauntlet thrown down by Osborne.

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Your first sentence undercuts your credibility. Our problems began 15 years ago with Labour over-spending on services and under-investing in our productive capacity.

And we have yet to see from the present Labour leadership a plan which encompasses wealth creation. How are we to pay for increases in services advertised by Labour? Borrowing or increased wealth production? If the latter, what is the Labour government’s role to be?

Interesting link to the BBC report on the 1981 budget; different times back then. Not that I remember it, I was nothing more than a twinkle in my father’s eye in ’81.

FWIW I think it would be dangerous for Labour to commit to this £25bn and a surplus by 2018/19; it would undermine their position on macro-economic policy. But as you say in your piece Labour take a high risk strategy if they don’t promise to follow the incumbent govt’s fiscal plan. They could attempt to argue against Osbornomics on the basis that the UK economy has failed to regain the ground lost since 2010 and that Osborne has failed to meet the targets that he set himself. But this would be a technical argument that may fail to get the attention it deserves.

As an alternative Miliband could choose to make his fiscal policy by stating an intention to radically reform the way in which we are governed and how we are taxed – not just tinkering with rates or marriage tax allowances – but a complete overhaul of the system to focus away from economic growth and onto quality of life. Is there really any huge benefit in a 0.2% increase in GDP if the fiscal contraction that caused it has resulted in 25,000 extra young people in long-term unemployment? The cost to our society as a consequence of the 255,000 long-term unemployed youth could be far greater than this 0.2%.

In order to differentiate itself from Tories Labour must at least offer a more equitable distribution of the financial consequences of debt reduction. Tax is the only way that government can raise money to spend on the social and economic infrastructure that allows businesses to function. As an interested non-specialist observer my preference would be to replace council tax with a Land Value Tax (with no exemption for non-residency), but to reduce income tax to a top rate of 40% and to reduce VAT to 15%.

This may not be the right answer but if Labour were to do something like this then it would change the debate from the “right” % of GDP to spend on the NHS to a broader argument of what government can do.

@madasafish – although Balls may have overdone the rhetoric on his argument, the economists (including Balls) opposed to the Chancellors debt reduction strategy never argued that the economy would never grow again without a fiscal stimulus. But that in the short term growth would be impaired. Simon Wren-Lewis explains this here http://mainlymacro.blogspot.co.uk/2013/09/austerity-and-living-standards.html

Brown certainly overdid the rhetoric but his chancellorship was in general marked by fiscal prudence (selling of gold notwithstanding). Which brings me to the Labour Profligcay myth as propounded by Eric Clyne in his comments.

The graph in this link shows that debt was reduced under Gordon Brown from a peak that occurred under the previous Tory government. Yes Labour spent more and increased borrowing to do so, but this was against a backdrop of rising GDP. Labour could have invested more in “production” but the political decision was taken to be laissez-faire on industrial policy but invest in schools, hospitals and transport infrastructure. Both of which, incidentally, were suffering from under-investment.

Arguably Labour should have restricted borrowing more than it did from 2003-2007, which would have made the recovery easier, but no-one at the time was stating the benefits of this. Certainly not the Tories who promised to match Labour spending as recently as 2008-9.

In summary – Osborne credibility – 5/10 is generous; Balls Credibility 0/10 is far too harsh. On balance I might say 6/10 for Balls and 3/10 for Osborne. All of which is a departure from Jonathan’s article and I feel a shroud of guilt laying over me as I realise how much time I have wasted writing this comment. This is about a political argument, so logic, reason and fact have no place here.

And ‘Hard Working Families’ – another bollocks slogan that needs canning. More meaningless bollocks and bloody irritating. People wonder does that mean pensioners weren’t hard working? What about singles? Childless couples?

The Tories squandered most of their own political capital on the economy by implementing the policies that led to 3 years of stagnation including a double dip recession.

So most people outside Westminster won’t give a fig for Osborne’s economically illiterate gauntlet. Osborne’s high politics barely register on the doorstep.

Labour would do well to ignore the hype.

Yeah, Osborne’s press acolytles will scream blue murder, but 2015 is looking like the next election where the dwindling collective power of the rightwing press is not going to advantage the Tories. 2010 was of course the first such election.